5 Things to Consider When Setting Up Your WAHM Business
As a start-up your business will be structured as one of these three main business entities; Sole Proprietor, LLC, Corporation.
Below are the basics steps you will need to take when establishing your new business.
1. Determine Your Business Entity (Sole Prop, LLC, Corp)
A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.
Forming a Sole Proprietorship
You do not have to take any formal action to form a sole proprietorship. As long as you are the only owner, this status automatically comes from your business activities. In fact, you may already own one without knowing it. If you are a freelance writer, for example, you are a sole proprietor.
But like all businesses, you need to obtain the necessary licenses and permits. Regulations vary by industry, state and locality. Use the Licensing & Permits tool to find a listing of federal, state and local permits, licenses and registrations you’ll need to run a business.
If you choose to operate under a name different than your own, you will most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for “doing business as”). You must choose an original name; it cannot already be claimed by another business.
Advantages of a Sole Proprietorship
Easy and inexpensive to form: A sole proprietorship is the simplest and least expensive business structure to establish. Costs are minimal, with legal costs limited to obtaining the necessary license or permits.
Complete control. Because you are the sole owner of the business, you have complete control over all decisions. You aren’t required to consult with anyone else when you need to make decisions or want to make changes.
Easy tax preparation. Your business is not taxed separately, so it’s easy to fulfill the tax reporting requirements for a sole proprietorship. The tax rates are also the lowest of the business structures.
Disadvantages of a Sole Proprietorship
Unlimited personal liability. Because there is no legal separation between you and your business, you can be held personally liable for the debts and obligations of the business. This risk extends to any liabilities incurred as a result of employee actions.
Limited Liability Company (LLC)
A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
The “owners” of an LLC are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs.
Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.
Forming an LLC
While each state has slight variations to forming an LLC, they all adhere to some general principles:
Choose a Business Name. There are 3 rules that your LLC name needs to follow: (1) it must be different from an existing LLC in your state, (2) it must indicate that it’s an LLC (such as “LLC” or Limited Company”) and (3) it must not include words restricted by your state (such as “bank” and “insurance”). Your business name is automatically registered with your state when you register your business, so you do not have to go through a separate process. Read more here about choosing a business name.
File the Articles of Organization. The “articles of organization” is a simple document that legitimizes your LLC and includes information like your business name, address, and the names of its members. For most states, you file with the Secretary of State. However, other states may require that you file with a different office such as the State Corporation Commission, Department of Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs, or the Division of Corporations & Commercial Code. Note: there may be an associated filing fee.
Create an Operating Agreement. Most states do not require operating agreements. However, an operating agreement is highly recommended for multi-member LLCs because it structures your LLC’s finances and organization, and provides rules and regulations for smooth operation. The operating agreement usually includes percentage of interests, allocation of profits and losses, member’s rights and responsibilities and other provisions.
Obtain Licenses and Permits. Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality.
Advantages of an LLC
Limited Liability. Members are protected from personal liability for business decisions or actions of the LLC. This means that if the LLC incurs debt or is sued, members’ personal assets are usually exempt. This is similar to the liability protections afforded to shareholders of a corporation. Keep in mind that limited liability means “limited” liability – members are not necessarily shielded from wrongful acts, including those of their employees.
Less Record keeping. An LLC’s operational ease is one of its greatest advantages. Compared to an S-Corporation, there is less registration paperwork and there are smaller start-up costs.
Sharing of Profits. There are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat equity. Consequently, it’s up to the members themselves to decide who has earned what percentage of the profits or losses.
Disadvantages of an LLC
Limited Life. In many states, when a member leaves an LLC, the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business. The remaining members can decide if they want to start a new LLC or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLC if a member decides to leave the business.
Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security. The entire net income of the LLC is subject to this tax.
Corporation (C Corporation)
A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs.
Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.
For businesses in that position, corporations offer the ability to sell ownership shares in the business through stock offerings. “Going public” through an initial public offering (IPO) is a major selling point in attracting investment capital and high quality employees.
Forming a Corporation
A corporation is formed under the laws of the state in which it is registered. To form a corporation you’ll need to establish your business name and register your legal name with your state government. If you choose to operate under a name different than the officially registered name, you’ll most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for “doing business as”). State laws vary, but generally corporations must include a corporate designation (Corporation, Incorporated, Limited) at the end of the business name.
To register your business as a corporation, you need to file certain documents, typically articles of incorporation, with your state’s Secretary of State office. Some states require corporations to establish directors and issue stock certificates to initial shareholders in the registration process. Contact your state business entity registration office to find out about specific filing requirements in the state where you form your business.
Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality.
Advantages of a Corporation
Limited Liability. When it comes to taking responsibility for business debts and actions of a corporation, shareholders’ personal assets are protected. Shareholders can generally only be held accountable for their investment in stock of the company.
Ability to Generate Capital. Corporations have an advantage when it comes to raising capital for their business – the ability to raise funds through the sale of stock.
Corporate Tax Treatment. Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.
Attractive to Potential Employees. Corporations are generally able to attract and hire high-quality and motivated employees because they offer competitive benefits and the potential for partial ownership through stock options.
Disadvantages of a Corporation
Time and Money. Corporations are costly and time-consuming ventures to start and operate. Incorporating requires start-up, operating and tax costs that most other structures do not require.
Double Taxing. In some cases, corporations are taxed twice – first, when the company makes a profit, and again when dividends are paid to shareholders.
Disadvantages of a Corporation
Additional Paperwork. Because corporations are highly regulated by federal, state, and in some cases local agencies, there are increased paperwork and record keeping burdens associated with this entity.
Check your state’s business licensing requirements.
2. Employer Identification Number (EIN)
You will want to request your (EIN) as soon as possible. This is sometimes also referred to as your Tax ID number.
As a Sole Proprietor you have the option of using your Social Security Number however I do not recommend this.
You can apply for your EIN online, by fax, mail or telephone however online is quick and easy.
Have your business name ready or you can use your own name if you will be a Sole Proprietor.
3. Bank Account (Business or Personal)
A separate bank account for your business is a necessity.
Does it have to be a business bank account?
No, not necessarily but you will want a separate account to both make deposits into and to use to purchase business necessities.
4. Business Names, DBA’s Websites, and Domains.
I always get the question about setting up multiple businesses under one name.
The exact question is this: if I am running three different businesses (in this case) , do I need to set up three different business entities?
My answer is no, however I prefer separate business entities for each different business. I think it is cleaner that way and keeps everything totally separate. Granted it is more work, but I find it the easier way to operate multiple businesses.
The alternative of course is to set-up one main business entity, let’s say an LLC.
As an example; my LLC could be named Walker Enterprises and then I will set up separate doing business as (dba’s) under Walker Enterprises.
Each state has it’s own policy on setting up dba’s but it is usually the more cost effective option and the easier way of setting up multiple businesses.
When choosing your business and domain name search google to make sure there aren’t any conflicts with your desired name. You will want a domain that is a derivative of your business name but short and as memorable as possible.
Also, check your social media outlets and make sure this name is not already taken or over used or possibly used in a manner that would bring a negative connotation to your business.
5. Set-Up Payment Accounts
At some point you will have to decide on a system to collect payments.
There are many options available however below is a list of the most popular. Note, this is not a comprehensive list.
PayPal is probably the most well known and respected of all payment systems.
- No startup costs, no termination fee, no monthly fees
- Accepts payments and all major credit cards with PayPal Payments Standards
- No monthly set-up, membership, or cancellation fees
- Money can be transferred to your bank account easily
- You can receive payments from international customers
- Online payment fees are 2.9% + $.30 per transaction within the US and 3.9% + fixed fee per transaction.
Stripe is another services that accepts international payments as well and supports businesses from US, Canada, UK, and Ireland.
- Requires no setup, monthly, or hidden fees.
- Accepts all major debit and credit cards from customers in every country in 100+ currencies.
- Supports credit cards, band and direct debit payments, local payment wallets, and cryptocurrency.
- Has plugins for WordPress, Drupal, Magento and Joomla to name a few.
- The “Pay As You Go” plan is 2.9% +$.30 per successful card charge.
- Accepts Bitcoin, Alipay, and ACH Debits
Payoneer also accepts international payments and allows funds to be sent to Payees in 200 countries.
- There is no charge for customers to send payments.
- The recipient is charged a single transfer fee of $3 on average per transaction.
- Payout occurs through a prepaid Mastercard, a transfer to a bank, local eWallets, or international check.
The 5 tips to consider when setting up your business are:
- Determine your business entity (Sole Proprietor, LLC, Corp)
- Request your Employer Identification Number also called Tax Id Number
- Set-up your Bank Account (Business or Personal)
- Select your Business Name and/or DBA, and Domain Name
- Establish your payment accounts
Please refer to your individual state’s small business set-up guidelines for information more specific to you.